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Title: Hidden Markov models for financial optimization problems
Authors: Roman, D
Mitra, G
Spagnolo, N
Keywords: Scenario generation;Asset pricing;Hidden Markov models;Extreme events;Stability;Conditional value at risk
Issue Date: 2009
Publisher: Oxford University Press
Citation: IMA Journal of Management Mathematics, 21(2): 111-129
Abstract: Many financial decision problems require scenarios for multivariate financial time series that capture their sequentially changing behaviour, including their extreme movements. We consider modelling financial time series by hidden Markov models (HMMs), which are regime-switching-type models. Estimating the parameters of an HMM is a difficult task and the multivariate case can pose serious implementation issues. After the parameter estimation, the calibrated model can be used as a scenario generator to describe the future realizations of asset prices. The scenario generator is tested in a single-period mean–conditional value-at-risk optimization problem for portfolio selection.
ISSN: 1471-678X
Appears in Collections:Dept of Mathematics Research Papers
Mathematical Sciences

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